The Subrogation Strategist

In Franklin Mut. Ins. Co. v. Castle Restoration & Constr., Inc., 2016 N.J. Super. Unpub. LEXIS 2300 (App. Div. Oct. 20, 2016), the Appellate Division of the Superior Court affirmed the dismissal of a subrogating property insurer’s claim based on New Jersey’s entire controversy doctrine, a doctrine that requires a party to litigate all aspects of a controversy in a single legal proceeding. Although the decision is unpublished and based on the specific factual circumstances of the case, the decision sends a cautionary reminder to insurers involved in a declaratory judgment action that they should not wait for the declaratory judgment action to be decided before taking action to protect their subrogation rights.

As stated in Castle Restoration, Sevastyan Ploshchansky (Ploshchansky) owned a condominium unit in Harmon Cove Towers (HCT), a condominium community located in Hudson County, New Jersey. Franklin Mutual Insurance Company (FMI) issued a homeowner’s insurance policy for Ploshchansky’s condominium.

HCT hired Falcon Engineering Co., LLC (Falcon) to provide consulting engineering services in connection with a restoration and waterproofing project at HCT. HCT also hired Castle Restoration and Construction, Inc. (Castle) to perform renovations. During renovations, Ploshchansky’s unit suffered water and structural damage. Although Ploshchansky filed an insurance claim with FMI, FMI denied the claim.

In October of 2010, Ploshchansky filed suit in Hudson County (the Hudson County action) against HCT and Taylor Management Company, Inc. (Taylor), the management company for the condominium complex, alleging that his unit suffered water and structural damage due to water invading the premises as a result of the renovations undertaken by HCT. Subsequently, HCT filed a third-party complaint against Falcon and Castle. Ploshchansky, however, did not amend his complaint to sue Falcon or Castle directly.

In July of 2013, Ploshchansky filed an action in Passaic County (the Passaic County action) against FMI, alleging that FMI wrongfully refused to pay his claim. In accordance with Rule 4:5-1(b)(2), Ploshchansky’s attorney certified that the Hudson County action was pending. Similarly, in FMI’s answer, FMI’s attorney certified that FMI was aware of the Hudson County action. Although FMI initially sought to intervene in the Hudson County action, FMI subsequently withdrew its motion.

In May of 2014, the judge in the Passaic County action decided Ploshchansky’s coverage action in his favor and entered judgment against FMI. In addition, the judge ordered FMI to pay Ploshchansky $107,160 in damages.  FMI did not appeal the decision.

On July 7, 2014, Ploshchansky settled his claims against HCT and HCT, having previously settled its third-party claim against Falcon, settled its claims against Castle in the Hudson County action. Thus, the trial court dismissed the Hudson County action.

Subsequently, FMI, as subrogee, filed a complaint in Hudson County against Falcon and Castle and moved to consolidate its case with the previously dismissed Hudson County action. After the trial court denied FMI’s request to consolidate the case with the dismissed Hudson County action, Falcon, relying on the entire controversy doctrine, moved to dismiss FMI’s complaint. The trial court, finding that FMI was fully aware of Ploshchansky’s action against HTC, that Falcon was a party to that action and that, despite this awareness, FMI allowed Ploshchansky to pursue his case to conclusion before seeking to file its separate complaint as Ploshchansky’s subrogee, granted Falcon’s motion. Holding that, under these circumstances, FMI had no claims to pursue, the court granted Falcon’s motion and dismissed the case.

On appeal, the Appellate Division held that, once Ploshchansky’s initial Hudson County action was resolved, any claim Ploshchansky had against Falcon was barred by the entire controversy doctrine. Thus, because Ploshchansky was barred from filing a claim, so was FMI who, as subrogee, stepped into Ploshchansky’s shoes. Even if, as FMI alleged, its subrogation claim did not arise until May of 2014, when it lost the Passaic County action and was ordered to pay Ploshchansky’s insurance claim, the Appellate Division held that, on July 31, 2014, when FMI filed its complaint against Falcon, FMI was standing in Ploshchansky’s shoes. Thus, because Ploshchansky’s claims against Falcon were barred and FMI had a fair and reasonable opportunity to litigate its claims against Falcon prior to the dismissal of Ploshchansky’s claims against Falcon in the Hudson County action, FMI’s claims were barred by the entire controversy doctrine.

Although the Appellate Division affirmed the decision dismissing FMI’s complaint, the court identified several actions FMI could have taken to protect its potential subrogation claim. First, FMI could have filed, in Hudson County, a motion to consolidate, seeking to consolidate the Hudson County and Passaic County actions. Upon consolidation, FMI could have moved to bifurcate the two matters, asking to have the coverage case resolved first, followed by Ploshchansky’s claims against Falcon. Second, FMI could have filed a timely motion to intervene in the Hudson County action to seek relief from Falcon, who was already a party to the action. In addition, to the extent that there was an issue with respect to whether FMI’s subrogation claim had, in fact, accrued against Falcon, FMI could have filed a complaint in Hudson County, as subrogee for Ploshchansky, asking a judge to resolve the issue. Finally, FMI could have filed a third-party action against Falcon in the Passaic County action.

Castle Restoration serves as a reminder that insurers involved in coverage disputes with their New Jersey insureds should not sit idly by when their insureds pursue claims against third-party tortfeasors. Rather, subrogating insurers should, even if they are in a dispute with their insureds over coverage issues, take action to protect their potential subrogation rights in one of the ways suggested by the Appellate Division.